Attorney Billing Methods – Which Method is the Best?
One of the main things that can set a successful attorney apart from a less successful one is how they charge their clients. They can charge hourly, fixed fee or contingency basis. But they can also use a hybrid form of billing. In this post, we look at the different billing methods and examine the various advantages and disadvantages.
Most Common: Hourly Billing
Hourly billing is the most common billing method used by attorneys. It is the most common way attorney’s bill. From an article from the ABA Commission on billable hours report:
BILLABLE HOURS REPORT -ABA COMMISSION-
"The 1960s marked the coming of age of the billable hour – an economic model that was created to address antitrust concerns with bar association fee schedules, to provide lawyers with a better handle on their own productivity and, more urgently, to address clients' demands for more information about the legal fees charged."
In a typical hourly billing situation, most attorneys use the 1/10, which is a 6-minute interval. If you were to call your attorney and talk for 5 minutes, the lawyer would charge you for .25 hours or their minimum charge.
The issue with hourly billing is that you have to track the hours diligently, and what we see often is that the attorneys will end up writing down many of their hourly charges if they seem excessive. Hourly billing lends itself to more disagreements with clients, which may be the root cause of the writing down of time.
Hourly billing also limits profitability. There are only so many billable hours in a day. To increase the revenue at a firm with hourly billing, you must increase your rates.
Gaining in Popularity: Fixed Fee Billing
With fixed-fee billing, the attorney must do the back work to determine the fixed fee. Defining the scope and the amount of work required will help in determining the price. This billing type works excellent for specific practice areas over others. It is an ideal approach to billing for immigration firms and family law. These practice types have repeatable processes. The "pros" to this type of billing are that the client knows the fees. It will open the door for a better attorney-client relationship. Fixed fee billing releases attorneys from being limited in the opportunity to find firm financial freedom.
The biggest "con" is not pricing the work correctly; therefore, there is still a component to tracking time and finding a good accounting firm that will help find clarity around tracking per client/work profitability. It is also essential to clearly define what is included in the fixed fee package.
"You don't get paid unless we do!" Contingency Billing
Personal injury attorneys most commonly use the type of fee. The attorney will be paid a percentage of the damages awarded at the end of the case and will have a prearranged contingency agreement. Once the attorney agrees to take the case, no charges for the attorney's time he or she works on the matter. However, the attorney will be paid a certain percentage of the damages that the client is awarded at the end of the case. Each state has its own rules on the legal fee percentages an attorney can put in the agreement.
Contingency fees can range from 5% to 50%, winning the case. If the lawyer does not win the lawsuit, the attorney will not be compensated. Depending on the client's agreement with the attorney, the client may still be obligated to reimburse the fees upfronted by the law firm. These fees could include filing fees, witness fees, deposition fees, and any law firm's overhead fees during the case.
The most obvious "pro" of this billing type is that it can be a very lucrative billing method. A successful attorney could gain to increase revenue beyond any hourly billing type. The biggest "con" of this type is cash flow can be challenging to manage. These matters may span several years. Careful tracking of expenses for this type of practice is paramount.
The Newer Method: Subscription Billing
Subscription-based billing is the new player in the legal industry. It started with the software Legal Zoom and is gaining popularity with the legal industry.
The agreement is based upon a set monthly fee. This type of billing works best with law firms that represent businesses. The fee will include unlimited legal advice, document review, and business planning, and strategy. Subscription billing removes the client's feeling when they call the attorney "the clock is ticking" and gives the client the ease of knowing what the fees will be so they can budget their legal fees accordingly. Additionally, this method will provide the firm with regular recurring revenue spread out throughout the year from the law firm's perspective.
Hybrid Billing: Why Choose only one of the above?
The hybrid method will include a combination of any of the above methods. Why only choose one? Hybrid billing is where a law firm could combine fixed fees with hourly or subscription based. Designing a menu of options for your clients may be the best way for a law firm to expand profitability. The attorney or partners can combine the methods and, with the right legal accounting or bookkeeping firm in place, determine which one puts the law firm on the path to financial freedom.
When it comes to finding a good accounting firm, there are many things to consider. At Artesani Accounting (our accounting firm), we understand how to work with your business type. We know your industry. Contact us today to learn more!